Mark Lackey and Pat Bolland talk about the marked difference between North American and European-Asian natural gas markets and investing opportunities on Straight Talk’s Noon-Hour, Sun News Network – video available online now.
Mark’s picks for these investments were Primeline Energy Holdings Inc. (TSXV: PEH), Greenfields Petroleum Corporation (TSXV: GNF) and Victory Nickel Inc. (TSX: NI) for its subsidiary Victory Silica Ltd.
At present natural gas prices are trading at US$4.58 per MCF on the NYMEX which represents the North American market at Henry Hub Louisiana. Natural gas prices are currently trading in China at US$16.00. The higher prices in China, and in other countries in Asia, are the result of rapidly growing demand for natural gas and the insufficient natural gas supply in the region.
The two major components that are driving up the natural gas demand in Asia are rapidly growing demand for electricity plus rising demand in the industrial sector. In China industrial output continues to grow at 10% per year and companies have been switching their heating and industrial processes away from diesel and heavy oil to natural gas. Natural gas is slightly cheaper than these oil products and is a much cleaner burning fuel which the Chinese Government is promoting given that country's exceptionally poor air quality prevailing for some three months every year. Electricity demand is growing by 10% per year and at present about 75% of the electricity production comes from coal-fired plants. Chinese policies are encouraging more electricity production from natural gas and uranium in order to diversify the electricity supply. In addition, in order to improve the air quality in its major cities China wants to reduce its reliance on coal (especially lignite) in order to cut sulphur oxide (SOx), nitrogen dioxide(NO2), carbon dioxide (CO2), as well as particulate matter. As a result we expect the demand for natural gas in China to triple over the next five years.
On the supply side Chinese drilling for natural gas is rising significantly and LNG imports are also increasing. We still expect natural gas prices in China to remain in the US$16 to US$18 per MCF over the next five years as the supply of natural gas will continue to struggle to keep up with the rapid growth in demand.
In Europe the present natural gas price has a range of US$4.50 to US$8.00 per MCF depending upon the jurisdiction. We expect the price range to move up over the next five years to US$6.00 per MCF on the low end and to US$10.00 per MCF on the high end as more Russian natural gas goes to China, instead of Europe, to take advantage of the higher prices. The Russians have the advantage relative to other exporters of natural gas to China since the Russians can send all their natural gas by pipeline to China while their competitors have to use LNG carriers or tankers to transport the fuel which is considerably more expensive.
One way for investors to play the North American natural gas market is to invest in the frac sand sector. Adoption of hydraulic fracturing (known as fracking) for drilling has resulted in the rapid demand increase for frac sand. Frac sand is a high purity quartz sand with very durable and round grains that are crush resistant. The hydraulic fracturing process uses frac sand in order to unlock the natural gas from rocks that do not have adequate pore spaces and thus allows the natural gas to flow to a well when traditional drilling and well techniques are ineffective.
CHF's client serving the Chinese natural gas marketplace is Primeline Energy Holdings Inc. (TSXV: PEH) which will become a strategic new supplier of natural gas into the East China market in about three months.
Meanwhile, CHF client Greenfields Petroleum Corporation (TSXV: GNF) is continuing to develop more wells that supply natural gas to Europe.
Here at home, CHF client Victory Nickel Inc. (TSX: NI) is a producer of North American frac sand through its wholly-owned subsidiary Victory Silica Ltd.
Other CHF clients in natural gas are Emerald Bay Energy Inc (TSXV: EBY) and Heritage Oil PLC (TSX: HOC, LSE: HOIL, HOX).